hello everyone welcome to business school 101 3m company formerly known as minnesota mining and manufacturing created some of the most iconic name brand products in the american economy some of these brands include scotch tape post-it notes scotchgard and others the company also has a significant presence in many industries including healthcare security and protection services and communications similarly as one of the largest corporate entities in the world samsung group's highly diversified business has an even wider range of industries including financial services information technology services machinery ship building and chemicals as you can see both 3m and samsung expanded their business through diversification so what exactly is the diversification strategy why do firms implement it and what are the major types of diversification strategies in this video i hope to answer these questions for you by definition diversification is a strategy used to expand market share or enter new markets by launching or acquiring new products it allows a company to grow by expanding market share in an existing market or by developing a new market presence in essence diversification involves innovation and market disruption normally companies apply a diversification strategy for three main reasons first mitigating risk in times of market volatility or downturn businesses will start introducing more products into their line this spreads their investments across multiple channels so one product can afford to lose sales while the overall company does not suffer to the same degree for example a fashion retailer often sells its products in multiple product categories because fashion is so trendy and unpredictable being diversified protects the company against the effects of various changes that may occur many fashion retailers also expand into new store formats such as products for children or babies in order to diversify their products second competitive defense another reason for firms to diversify is that underserved locations or customers have available revenue for competitors in their industry to take advantage of if companies do not diversify and expand to fill the additional demands their competitors are likely to do so therefore if you get in first you can often increase your customer base or establish yourself as a top provider for example movie rental provider blockbuster dissolved in part because it failed to diversify and compete with its competitors such as netflix youtube and hulu moving into the new online streaming formats third increasing profits finally businesses may choose to diversify to raise profits for example coffee shops will add to their line with food options such as sandwiches and pastries which may be used as a strategy to increase profits in a similar vein gyms may choose to add a sauna room or physio room this would not require any added space but could be rented out to add another stream of income generally there are three types of diversification strategies first related diversification related diversification occurs when a firm moves to a new industry that has important similarities with the firm's existing industry or industries for instance because films and television are both aspects of entertainment disney's purchase of abc is an example of related diversification some firms that engage in related diversification aim to develop and exploit a core competency to become more successful a core competency is a skill set that is difficult for competitors to imitate can be leveraged in different businesses and contributes to the benefits enjoyed by customers within each business honda motor company provides another excellent example of leveraging a core competency through related diversification although honda is best known for its cars and trucks the company started out in the motorcycle business through competing in this business honda developed a unique ability to build small and reliable engines when executives decided to diversify into the automobile industry honda was successful in part because it leveraged this ability within its new business honda also applied its engine building skills in the all-terrain vehicle lawn mower and boat motor industries second unrelated diversification don't put all your eggs in one basket is often a good motto for individual investors by building a portfolio of stocks an investor can minimize the chances of suffering huge loss some executives take a similar approach rather than trying to develop synergy across businesses they see greater financial stability for their firms by owning an array of companies however most unrelated diversification efforts do not have happy endings for example harley davidson once tried to sell harley branded bottled water starbucks tried to diversify into offering starbucks branded furniture both efforts were disasters although harley-davidson and starbucks both are iconic brands these strategic resources simply did not transfer effectively to the bottled water and furniture businesses third geographic diversification firms may also diversify through expanding geographically big box stores such as target and best buy use this strategy starbucks and kfc have found success with international expansion as well as domestic expansion synergy is developed in several ways many of the administrative functions such as logistics procurement human resources and legal matters can all be consolidated at the corporate level so they do not need to be duplicated at each location new store development is also made easier having already developed new stores the firm can establish a process that it has learned from previously establishing stores and can implement the best practice to efficiently build out equip and supply new stores all right let's do a quick summary diversification is a strategy used to expand market share or enter new markets by launching or acquiring new products it allows a company to grow by expanding market shares in an existing market or by developing a new market presence essentially diversification involves innovation and market disruption the three main reasons companies apply a diversification strategy are the following mitigating risk competitive defense and to increase profits there are three major types of diversification strategies related diversification unrelated diversification and geographic diversification many business researchers show that compared with unrelated diversification related diversification has a better chance to succeed because it helps firms better leverage their core competency and further enhance their brand image so what do you think about the diversification strategy please leave your thoughts in a comment below if you enjoyed this video be sure to give it a thumbs up and to subscribe to the channel thanks for watching and i will see you next time